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Tuesday, June 18, 2013

One year ago tomorrow, social networking phenomenon Facebook went public in one of the most highly anticipated initial public offerings of the last decade.

Leading up to the IPO, which valued the company at a whopping $104 billion — or 100 times revenue — the hype was intense. Facebook, market prognosticators predicted, would soar in the first day of trading, generating easy gains for the investors who rushed for a piece of the action. Indeed, investor demand was so intense that Facebook boosted by 25% the amount of shares it planned to sell to the public. Finally, on the morning of May 18, after months, even years, of anticipation, Facebook founder and CEO Mark Zuckerberg rang NASDAQ’s opening bell by remote from Facebook’s campus in Menlo Park, California.

And then all hell broke loose.

Technical glitches on the NASDAQ exchange delayed the first trades for 30 hair-raising, white-knuckled minutes. After the NASDAQ commenced trading, Facebook shares jumped 13% to hit $43, only to retreat quickly to the initial offering price of $38. At that point, Facebook’s IPO underwriters, including the largest banks on Wall Street led by Morgan Stanley, stepped in and waged a furious buying battle to support the offering level. Thanks to their efforts, Facebook closed a frenetic first day of trading at $38.23, essentially flat.

Although Facebook shares slowly climbed back above $30 by January of this year, momentum stalled and Facebook shares are currently bouncing around $26 per share, down more than 30% since the IPO. For Facebook, the IPO was a major success because it raised over $10 billion for the company. But for investors, Facebook’s IPO is widely considered to be one of the most disappointing public stock offerings in U.S. history.

One year ago, TIME published an article examining the kind of revenue opportunities Facebook might seize upon to justify its sky-high valuation. Looking back at the list, many of those opportunities remain untapped. The company has only scratched the surface, for example, when it comes to leveraging the vast hoard of user data it is accumulating. A true Facebook phone hasn’t materialized, nor has a credit card-based E-commerce “passport.” And though Facebook recently announced a “semantic” search engine, it shows no signs of threatening Web search titan Google’s dominance.

But there have also been some notable successes. Facebook’s mobile efforts, in particular, are starting to achieve impressive results. Last quarter, 30% of Facebook’s ad revenue came from mobile devices, up from 23% during the previous quarter and 14% the quarter before that. In the first quarter of 2012, Facebook’s mobile revenue constituted 0% of its total revenue. Perhaps most important, Facebook’s share of mobile time spent online is soaring, offsetting desktop declines. Facebook’s share of mobile minutes has doubled from 11% to 22% over the last year, according to JP Morgan. The company has also begun packing more ads into the News Feed.

A year ago, we also asked if Facebook could possibly maintain its “cool factor” in the long term. The answer is that it might not matter: Although there are signs that younger users are increasingly flocking to other social services, Facebook remains far and away the top social network on the web. Overall, in fact, Facebook seems to be maturing into a reliably profitable public company, even if its share price remains more than 30% below the IPO level.

The ill-effects of that IPO, however, still represent a lingering cloud hanging over the company. In the immediate aftermath of the offering, recriminations flew fast and furious. NASDAQ CEO Robert Greifeld told a conference of corporate directors at Stanford University’s Law School that “arrogance” and “overconfidence” among NASDAQ officials were partly to blame for the technical breakdowns that plagued the offering. Simply put, NASDAQ’s systems, which had been repeatedly tested before the offering, couldn’t handle the massive volume of trading. NASDAQ’s breakdown may have spooked investors, causing many to sell, driving the stock price down, as Facebook suggested in a legal filing last year.

Irate investors filed dozens of lawsuits against Facebook, its underwriters, and the NASDAQ. One set of suits alleged that Facebook’s IPO documents “were negligently prepared and failed to disclose material information about Facebook’s business, operations and prospects.” Specifically, the lawsuits charged that Facebook hid the financial impact of challenges to its mobile advertising business — challenges that would have been material information for prospective Facebook investors.

Another set of Facebook lawsuits charged that company executives gave the underwriters more detail about the financial impact of challenges to its mobile advertising business than they did to the investing public. The underwriters, in turn, lowered their financial forecasts, which they then “selectively disclosed” to big, favored clients like hedge funds and institutional investors, but not the public, according to the lawsuits.

Predictably, Facebook maintained that it acted appropriately by updating its IPO documents with the SEC before the offering to reflect that the number of daily users was increasing faster than the number of ads the company was serving, a change it attributed to its fast-growing mobile user base. (Facebook’s SEC update was delivered in dense, financial legalese, but may in fact have satisfied the disclosure requirements.)

Thirty-one of the lawsuits have now been consolidated into one umbrella case before a judge in the Southern District of New York. Earlier this month, Facebook asked a judge to throw out the umbrella lawsuit, arguing that it had no obligation to disclose internal data on how increased mobile usage might affect the company’s financial performance. But Facebook’s legal headaches continue. Less than two weeks ago, the company was hit by a new IPO-related lawsuit seeking to hold Zuckerberg and other executives responsible for the botched offering.

Given the immense financial windfall the IPO delivered to Facebook insiders, it’s not hard to understand why ordinary investors were upset. Zuckerberg cashed out to the tune of $1.14 billion. Early investors Accel Partners, DST Global, Mail.ru Group and Tiger Global generated $2.1 billion, $1.7 billion, $745 million, and $722 million, respectively. Tech mogul Peter Thiel sold $638 million worth of shares. And Wall Street titan Goldman Sachs cashed out to the tune of $923 million.

Of course, venture capitalists and early employees took big risks, and deserve to be rewarded. But the contrasting fortunes of company insiders, who made billions, and ordinary shareholders, who saw their Facebook investments fall off a cliff, raised basic questions about the fairness of the IPO process. Facebook’s IPO reinforced the stereotype that the IPO process gives deep-pocketed investors and well-connected insiders an advantage over everyday investors.

Facebook is making good progress on several fronts, especially mobile, but the company needs to boost earnings growth significantly if it wants to see its stock price return to its IPO level. Right now, the market just doesn’t see that happening. “Facebook’s share price is telling you that investors are more skeptical about the company’s prospects than a year ago,” Wedbush analyst Michael Pachter told MarketWatch. Another thing investors are likely skeptical about? The IPO process itself. As the old adage goes: “Fool me once, shame on you. Fool me twice, shame on me.”